Jan. 7 (Bloomberg) — The Israeli government will weigh the future of its military operation against Hamas in the Gaza Strip, as mounting casualties among Palestinian civilians increased pressure for a truce.

At least 40 Palestinians were killed when Israeli forces struck a school run by the United Nations in Gaza, a UN official said. Israel, which struck at least 40 more Hamas targets overnight, said it responded after its soldiers were fired at from the building.

The school deaths yesterday added urgency to diplomatic efforts aimed at reaching a cease-fire as the conflict entered its 12th day. Egyptian President Hosni Mubarak proposed a new initiative last night and French President Nicolas Sarkozy, who has been lobbying throughout the region for a truce, said the casualties at the school demonstrate the urgent need to stop the fighting. “Time works against us,” he said.

Palestinian Authority President Mahmoud Abbas, UN Secretary- General Ban Ki-moon and U.S. Secretary of State Condoleezza Rice backed the proposal and Mubarak’s call for peace talks in Cairo, which may begin as early as today.

“The Security Cabinet will meet this morning to discuss the future of the military effort in Gaza, as well as the diplomatic efforts,” said Israeli Foreign Ministry spokesman Andy David.

Israeli President Shimon Peres, commenting during an interview with Sky News, said it may take “some days” to study the details of the cease-fire proposal.

Christopher Gunness, a spokesman for the UN Relief and Works Agency in Jerusalem, said in a phone interview he could confirm 40 dead and 45 injured, after three Israeli artillery shells hit the school in northern Gaza.

Rocket-Firing Cell

The Israeli army said in a faxed statement last night its investigations showed that “among the dead in the school were members of the military wing of the Hamas terror organization and a cell firing rockets and mortars at Israeli forces.”

The incident at the school may force the Israeli government to scale back its military offensive aimed at stopping rocket attacks by Palestinian militants on cities and towns in the country’s south.

“If it becomes the dominant story for the next 48 hours, especially in the U.S., then it will give Hamas a significant advantage,” Gerald Steinberg, a professor of political science at Bar-Ilan University, said in a telephone interview.

As during the war in Lebanon in 2006, the current fighting “is as much about images and public relations as it is about military developments,” Steinberg said.

Street Fighting

Israel’s military expanded its hold over the 40-kilometer (25-mile) long coastal territory, fighting in the streets of Gaza City in the north and Khan Yunis in the south. Israel continued its military operations through the night in Gaza, striking at least 40 targets including rocket launching sites, groups of Hamas gunmen, and tunnels used for weapons storage, the army said in an e-mailed statement.

Palestinian militants made their longest strike so far yesterday when a rocket hit the Israeli city of Gedera, 45 kilometers to the north, injuring a 3-month-old infant, police said. A Hamas spokesman said the group’s military wing has dozens of suicide bombers ready to confront Israeli troops in the streets of Gaza.

At least 35 rockets struck Israeli territory yesterday compared with 40 the day before, according to the army. That’s down from a peak of 76 on Dec. 27, the first day of the operation. As many as 3,200 rockets and mortar shells have been fired at Israel since the start of 2008. Rocket attacks have killed four Israelis since fighting began. At least five rockets from Gaza struck Israel this morning, police said.

‘Friendly Fire’

Six Israeli soldiers have been killed since the ground fighting began, the army said. One died on Jan. 4, three died and 24 were wounded by a tank shell in a “friendly fire incident” in northern Gaza on Jan. 5, and two more were killed in separate incidents yesterday, the military said in an e-mailed statement.

At least 630 Palestinians have died in the conflict and 2,600 have been wounded, said Mu’awia Hassanein, chief of emergency medical services in Gaza.

UN officials said as many as a quarter of the Palestinians killed were civilians, a figure Israel disputes as too high.

In reacting to the deaths at the school, the Israeli military accused Hamas of making “cynical use” of civilians by firing from schools.

UNRWA opened several schools as shelters for civilians whose houses in refugee camps were destroyed by Israeli forces. No classes were in session.

“Even though the blue UN flag was flying and visible, Israel targeted our school,” Adnan Abu Hasna, a UNRWA spokesman in Gaza, said in a telephone interview. UNRWA said it was “99.9” percent certain there were no militants in the school.

Mosques, Schools

Several mosques and schools have been struck since Israel began its assault on Gaza 12 days ago. Israel alleges Hamas was using the buildings to hide arms and wanted militants.

Gaza’s water and sewage systems are on the verge of collapse because of power shortages, the UN Office for the Coordination of Humanitarian Affairs said yesterday. More than 530,000 people among Gaza’s population of 1.4 million are completely cut off from running water and the rest receive water only every few days, the agency said in an e-mailed statement.

Israel will open a “humanitarian corridor” into the Gaza Strip, the office of Israeli Prime Minister Ehud Olmert said in an e-mailed statement shortly after midnight. It said that certain “geographic areas” would be made accessible to the local population for limited periods of time during which they could “stock up.”

Humanitarian Corridor

The plan for a humanitarian corridor “in no way compromises our call for an immediate cease-fire,” said UNRWA’s Gunness.

Mubarak called for a cease-fire for a “limited period” that would allow food, fuel and medicine to enter Gaza and give time for talks on a “comprehensive and lasting” agreement to end the fighting, French Foreign Minister Bernard Kouchner said.

Israel’s attack on Gaza is “genocide,” Abbas told the UN Security Council late yesterday.

Abbas left New York late yesterday for the Egyptian capital, in response to Mubarak’s invitation, according to Palestinian Authority envoy Saeb Erekat. Israel’s Ambassador to the UN Gabriela Shalev said her government is “considering” the initiative.

“We invite Israelis and Palestinians to meet and discuss how not to renew the fighting, and this includes securing the borders and lifting the blockade,” Mubarak said at a news conference last night in Sharm el-Sheikh, Egypt, after meeting with Sarkozy.

Sarkozy also met with Syrian President Bashar al-Assad yesterday after holding talks the day before with Olmert and Abbas.

Syrian Influence

“I am sure that Syria has an influence; Syria should help us convince Hamas to listen to the voice of reason,” Sarkozy said yesterday at a news conference. Al-Assad said he favored a cease-fire, while describing Israel’s offensive in Gaza as a “war crime.”

Venezuela expelled Israel’s ambassador from Caracas yesterday and said the Israeli government should be tried for war crimes over the invasion of the Gaza Strip.

Israel is considering in response whether to expel Venezuela’s charge d’affaires in Tel Aviv, said the Foreign Ministry.

Last week, Israel rejected a French-proposed 48-hour truce with Hamas, saying it was seeking a permanent end to the Gaza rocket attacks.

Israeli stocks climbed yesterday for a seventh day, the longest winning streak since October 2007, following gains in European stocks and U.S. futures. The benchmark TA-25 Index of stocks has gained 12 percent since Dec. 27, when the Gaza offensive began, tracking a global rally.

Economic Blockade

The shekel fell as much as 1.46 percent to 3.8870 per dollar, and traded at 3.8844 as of 5:19 p.m. yesterday.

Israel began the campaign to halt rocket attacks after a six-month cease-fire with Hamas expired Dec. 19. Hamas, designated a terrorist organization by the U.S. and the European Union, refused to renew the truce because it said Israel hadn’t eased its economic blockade of Gaza. Militants fired 70 rockets at Israel the day before the cease-fire ended.